Should Nestle buy Hain Celestial?

Nestle was this week reportedly said to be eyeing a possible takeover bid for US natural and organic products group Hain Celestial - but would it be a shrewd move for the world's largest food maker? Andy Coyne reports.

Under recently-installed CEO Mark Schneider, Nestle has already made some moves to reshape its portfolio - but could a more significant transaction be in the offing?

The report sent Hain Celestial's shares rising and sparked a lot of industry chatter about whether the report had weight and whether Nestle should move for the US group, which, though among the largest players in the the country's natural and organic sectors, has seen its growth slow in recent quarters.

Hain Celestial's recent performance

The impetus for such a deal seems, on the face of it, to be easy to explain.

New York-based Hain Celestial, which has a portfolio that also includes brands such as Earth's Best baby food and Terra snacks, has, through years of M&A and then growing the acquired assets has been at the forefront of the rise in the natural and organic markets in the US.

However, in recent years, a growing number of the major, conventional, packaged food manufacturers operating in the US (so-called 'Big Food') have moved to get skin in the game and started to take a bigger slice of the natural/organic pie in the US, while private label has also made inroads in some categories (think Kroger's Simple Truth range).

Against that backdrop, Hain Celestial has seen some pressure on its sales in the US, its largest single market.

Overall, the company, which has smaller operations in the UK, Europe and Asia, reported net sales of US$2.85bn for the 12 months to the end of June, down 1% on a year earlier, with exchange rates weighing on its top line. However, in the US, Hain Celestial saw its net sales slide 5% to $1.2bn. Operating income was also down at $111m, compared to $150m in the previous 12 months.

Hain Celestial's net income of $67.4m was an improvement on the $47.4m made the year before - but it was boosted by a much smaller provision for income taxes.

Earlier this month, Hain Celestial published the financial results for the first quarter of its new financial year, a period that ran to 30 September. The numbers looked more positive, with overall net sales up 4% and US net sales also 4% higher year-on-year.

However, some on Wall Street thought the underlying picture was more mixed.

Barclays analyst Andrew Lazar said the growth Hain Celestial saw in the US during the quarter was "well ahead of the flattish overall consumption in the quarter - although excluding the SKU rationalisation and inventory adjustments in the year-ago period, reported sales and consumption match up more closely".

He added: "If we just focus on Hain's top selling 500 SKUs, which are the clear focus and account for 93% of sales, US consumption rose just 1% year-on-year in the past 12 weeks - better than the average packaged good space to be sure but still below the growth coming from the overall natural and organic space."

Meanwhile, Nestle, like most major food companies, is keen to have greater exposure to faster-growth areas of the food market. This year, it has already invested in what it sees are more buoyant parts of the US food sector, snapping up vegetarian foods business Sweet Earth. It is also looking to sell its slow-growth US confectionery unit.

In the one corner, we have a business in an attractive sector showing some vulnerability and, in the other, a larger business wanting to diversify into faster-growth areas. There are other factors that could make a deal a possibility.

The presence of activist investors

In September, Hain Celestial announced it had entered a "mutual cooperation" deal with activist investor Engaged Capital, which had taken a 10% stake in the company over the summer.

Engaged Capital founder and CEO Glenn Welling joined the Hain Celestial board, with Bloomberg's report on Monday suggesting he has been pushing for changes at the company, including a sale.

Writing on 8 November, analysts at US investment bank Sanford Bernstein said: "Hain has been working with activist investor Engaged Capital to identify ways to unlock value for shareholders. This could involve selling the company either outright or in parts."

Nestle, meanwhile, also has an activist investor amongst its shareholders in the shape of Third Point's Daniel Loeb. He also put pressure on Nestle during the summer and, even after the company announced plans to focus investment on faster-growing parts of its business and set a margin target, still said in October there was more opportunity for Schneider to "unlock value'' at the Swiss food giant.

Reflecting on the report linking Nestle with Hain Celestial, France-based finance house Kepler Cheuvreux highlighted those comments from Schneider and said: "As a result, the group is likely to be linked with any business in on-trend wellness segments as well as its focus areas in consumer health, nutrition, pet care, coffee and water."

Analysts weigh up financial and strategic factors

Post the Bloomberg claims, analysts have taken a close look at the potential deal.

By and large, they seem favourably inclined to the news in strategic terms, with reservations surrounding a likely valuation.

Alain Oberhuber, a partner at Switzerland-based financial services firm Mainfirst, said: "In our view, if realised, this would be an expensive acquisition based on current pre-acquisition valuation multiples," he said. "The potential deal also looks less inspiring on relative profitability. While an outcome to a deal is currently uncertain, overall we do not find Hain Celestial attractive at current multiples, and there would need to be significant sales and cost synergies to justify such a deal."

However, Oberhuber can see some upside in such a deal happening in strategic terms. "The positive is that Hain Celestial is in an interesting organic and vegetarian category. Furthermore, Nestle could be interested in the US distribution network of Hain Celestial," he said.

At Kepler Cheuvreux, Jon Cox takes the view a Nestle move for Hain Celestial "makes sense and is easily affordable, assuming a $5bn EV price tag". It said such a price tag is "reasonable".

Cox said: "We believe such a move would make strategic sense given faster growth in on-trend segments such as organic, which is perceived as healthier by consumers. Nestlé is mostly introducing organic products in a build approach but buying Hain Celestial would provide critical mass.

"We believe the reports underscore the transformation underway at Nestle under CEO Mark Schneider, which is designed to accelerate organic sales
growth and earnings."

Wells Fargo's John Baumgartner said Nestle has the financial flexibility not to have to worry about leveraging up too much to buy Hain Celestial. He described the suggested valuation of US$4.8bn as "a fancy one" but said Nestle's scale could allow it to pay a high price.

But despite the credibility attached to Bloomberg's report, it is not yet a done deal and Hain Celestial may seek a different development path.

Writing earlier this month, Sanford Bernstein wrote: "Beyond a sale in the near-term, we also believe there are ample opportunities for cost savings (e.g. SKU rationalisation) to drive meaningful margin expansion."

And, more specifically on the potential strategic alternatives in front of Hain Celestial, Baumgartner suggested: "Our thesis on Hain is that it can best maximise value with the carve up of its assets to strategic buyers, very similar to Sara Lee's approach five years ago."

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